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Call For Builders: Onboard The Next Trillions In DeFi With Confidential Lending

February 20, 2025
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Jason Delabays

Decentralized finance (DeFi) has proven its worth with lending protocols like Aave, Morpho, and Euler, driving billions in total value locked (TVL) through battle-tested, trustless systems. Yet, the global financial market—moving trillions daily in loans, bonds, and credit lines—remains largely untapped. DeFi’s promise is to capture this immense value with unparalleled capital efficiency, but there’s a hurdle: institutions and high-net-worth players demand confidentiality, while public blockchains expose every deposit, loan, and withdrawal. This transparency is a strength for some, but a barrier in most cases.

This is a call to builders—developers, DeFi innovators, and financial pioneers—to bridge that gap. With Zama’s Fully Homomorphic Encryption blockchain protocol launching in 2025 on mainnet, we’re handing you the tools to bring institutions into DeFi by allowing them to keep their trades and positions private.

Imagine lending markets where collateral and debt amounts are hidden, uncollateralized loans are enabled through encrypted credit data, and MEV (Maximum Extractable Value) attacks are curtailed—all onchain, trustless, and composable. Let’s reinvent lending to unlock the next trillion in TVL.

Imagine a blockchain where you can compute on encrypted data without ever decrypting it, keeping everything completely confidential. That’s exactly what Zama’s Fully Homomorphic Encryption (FHE) blockchain protocol makes possible. This technology lets developers build confidentiality-first applications on Ethereum with ease, using tools they already know—like Solidity, the standard programming language for Ethereum smart contracts. All it takes is adding one new data type: encrypted integers (euint). This simplicity makes it seamless to integrate confidentiality into existing systems.

Unlike zero-knowledge based confidentiality solutions, which can sometimes lock applications into silos, FHE keeps blockchain’s composability intact. Think of composability as the "lego" system of blockchain: protocols can stack and interact freely, sparking innovation without breaking confidentiality.

Confidential ERC-20s: Powering Private Lending with Zama’s FHE Blockchain Protocol

With Zama’s technology, we get confidential ERC-20 tokens. These are standard tokens—like WETH or USDC—wrapped into encrypted versions (e.g., cWETH or cUSDC). The token amounts stay hidden, visible only to those with decryption keys, while the smart contracts keep working as usual. Validators and outsiders can see the transaction happen, but the numbers? Those stay secret.

Here’s a real-world example in a lending protocol:

  • Step 1: Alice wraps 1,000 WETH into 1,000 cWETH and deposits it as collateral.
  • Step 2: She requests a loan with a 50% loan-to-value (LTV) ratio.
  • Step 3: The smart contract, powered by FHE, calculates her eligibility (500 cUSDC), mints the encrypted loan amount, and sends it to her—all without revealing the numbers.

The result? Lenders earn yield, Alice gets her loan, and the entire process stays private. This isn’t just an upgrade to platforms like Aave or Morpho—it’s a foundational primitive for private lending that institutions can rely on.

Uncollateralized Lending: Confidentiality Meets Creditworthiness

Traditional finance rarely relies on over-collateralization; most loans hinge on creditworthiness tied to identity or reputation. DeFi’s dependence on locked collateral limits its scope, but FHE can change that by enabling uncollateralized lending onchain—privately.

Here’s the vision:

  • Users submit encrypted KYC data or credit scores to the protocol.
  • The smart contract evaluates this data using FHE (e.g., “is credit score > 700?”) without decrypting it.
  • Eligible users borrow without collateral, while confidentiality holds.
  • If a borrower defaults, the lender gains decryption rights to pursue offchain enforcement.

This mirrors real-world lending—where credit, not collateral, drives most loans—while keeping DeFi trustless. Institutions accustomed to underwriting can now participate onchain without exposing sensitive data.

Taming MEV: Encrypted Amounts Fight Exploitation

MEV—frontrunning, sandwich attacks, and backrunning—erodes user value in DeFi, relying on visible transaction details. Confidential ERC-20s disrupt this by hiding amounts. A bot can’t sandwich a trade it can’t size up, and frontrunning becomes guesswork. While timing and patterns might still leak hints, encrypted amounts raise the bar, making predatory strategies harder and costlier.

A lending protocol with FHE doesn’t just hide collateral—it creates a fairer market, appealing to institutions wary of DeFi’s current vulnerabilities.

The Vision: A Lending Primitive for Institutions and Beyond

Take Aave’s pooled liquidity or Morpho’s isolated markets and rebuild them with confidential ERC-20s. Then push further: add uncollateralized lending backed by encrypted credit scores and MEV protection through hidden amounts. This isn’t a patch—it’s a new primitive.

Picture this:

  • For institutions: Private collateral pools where positions stay confidential, with optional credit-based borrowing.
  • For retail: Loans without locking up assets, shielded from MEV bots.
  • For protocols: A chance to evolve—Aave, Morpho, Euler—into confidentiality-first systems that scale to trillions.

Public blockchains beat private ones (Hyperledger, Corda) on openness and interoperability. With FHE, they can now match them on confidentiality too.

Challenges and Opportunities

Building this frontier requires innovation. Here’s the design space to explore:

  • Liquidations: Encrypted values complicate triggers. FHE supports comparisons, but notifying liquidators discreetly might need encrypted events or offchain relays.
  • Credit Systems: Structuring encrypted KYC and default enforcement needs legal and technical alignment—how do you balance confidentiality and accountability?
  • MEV Defense: Pair encrypted amounts with batching or time-locks to further obscure patterns.
  • Liquidity: cWETH splits from WETH—yield incentives or seamless wrappers can bridge the gap.
  • UX: Decryption tools must be wallet-simple.
  • Oracles: Public prices might hint at values—FHE-compatible oracles could solve this later.

These are puzzles to solve, not barriers to stop you.

Why Now?

DeFi won’t scale to trillions without confidentiality. Institutions won’t join if every move is public, and retail users deserve MEV protection and credit access. Zama’s fhEVM testnet is live on Sepolia, our docs are live, and 2025’s rollout is near. This is your shot to build the lending protocol that pitches: “DeFi efficiency, Swiss-bank confidentiality, and real-world credit—all onchain.”

Join Us

Builders, entrepreneurs, protocols—we’re calling you. Test confidential ERC-20s. Prototype uncollateralized lending. Design MEV-resistant markets. Start building now, and let’s make lending private, powerful, and institutional-ready.

Who’s in? Contact us to get started.

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Privacy is necessary for an open society in the electronic age. Privacy is not secrecy. A private matter is something one doesn't want the whole world to know, but a secret matter is something one doesn't want anybody to know. Privacy is the power to selectively reveal oneself to the world.If two parties have some sort of dealings, then each has a memory of their interaction. Each party can speak about their own memory of this; how could anyone prevent it? One could pass laws against it, but the freedom of speech, even more than privacy, is fundamental to an open society; we seek not to restrict any speech at all. If many parties speak together in the same forum, each can speak to all the others and aggregate together knowledge about individuals and other parties. The power of electronic communications has enabled such group speech, and it will not go away merely because we might want it to.Since we desire privacy, we must ensure that each party to a transaction have knowledge only of that which is directly necessary for that transaction. Since any information can be spoken of, we must ensure that we reveal as little as possible. In most cases personal identity is not salient. When I purchase a magazine at a store and hand cash to the clerk, there is no need to know who I am. When I ask my electronic mail provider to send and receive messages, my provider need not know to whom I am speaking or what I am saying or what others are saying to me; my provider only need know how to get the message there and how much I owe them in fees. When my identity is revealed by the underlying mechanism of the transaction, I have no privacy. I cannot here selectively reveal myself; I must always reveal myself.Therefore, privacy in an open society requires anonymous transaction systems. Until now, cash has been the primary such system. An anonymous transaction system is not a secret transaction system. An anonymous system empowers individuals to reveal their identity when desired and only when desired; this is the essence of privacy.Privacy in an open society also requires cryptography. If I say something, I want it heard only by those for whom I intend it. If the content of my speech is available to the world, I have no privacy. To encrypt is to indicate the desire for privacy, and to encrypt with weak cryptography is to indicate not too much desire for privacy. Furthermore, to reveal one's identity with assurance when the default is anonymity requires the cryptographic signature.We cannot expect governments, corporations, or other large, faceless organizations to grant us privacy out of their beneficence. It is to their advantage to speak of us, and we should expect that they will speak. To try to prevent their speech is to fight against the realities of information. Information does not just want to be free, it longs to be free. Information expands to fill the available storage space. Information is Rumor's younger, stronger cousin; Information is fleeter of foot, has more eyes, knows more, and understands less than Rumor.We must defend our own privacy if we expect to have any. We must come together and create systems which allow anonymous transactions to take place. People have been defending their own privacy for centuries with whispers, darkness, envelopes, closed doors, secret handshakes, and couriers. The technologies of the past did not allow for strong privacy, but electronic technologies do.We the Cypherpunks are dedicated to building anonymous systems. We are defending our privacy with cryptography, with anonymous mail forwarding systems, with digital signatures, and with electronic money.Cypherpunks write code. We know that someone has to write software to defend privacy, and since we can't get privacy unless we all do, we're going to write it. We publish our code so that our fellow Cypherpunks may practice and play with it. Our code is free for all to use, worldwide. We don't much care if you don't approve of the software we write. We know that software can't be destroyed and that a widely dispersed system can't be shut down.Cypherpunks deplore regulations on cryptography, for encryption is fundamentally a private act. The act of encryption, in fact, removes information from the public realm. Even laws against cryptography reach only so far as a nation's border and the arm of its violence. Cryptography will ineluctably spread over the whole globe, and with it the anonymous transactions systems that it makes possible.For privacy to be widespread it must be part of a social contract. People must come and together deploy these systems for the common good. Privacy only extends so far as the cooperation of one's fellows in society. We the Cypherpunks seek your questions and your concerns and hope we may engage you so that we do not deceive ourselves. We will not, however, be moved out of our course because some may disagree with our goals.The Cypherpunks are actively engaged in making the networks safer for privacy. Let us proceed together apace.Onward. By Eric Hughes. 9 March 1993.